Monday, January 23, 2012

Chart of the Day: The Bright Future of Shale Gas

According to data in the EIA's Annual Energy Outlook 2012, domestic shale gas production will increase from its current 23% share of total natural gas production to 49% by 2035 (see chart above, click to enlarge).

15 Comments:

At 1/23/2012 10:27 AM, Blogger juandos said...

Guess what Professor Mark, its even sunnier than this bright future if a work around regarding California's moonbats can be found...

From the Next Big Future blog comes this posting replete with links: EIA estimates California Monterey to have four times the technically recoverable oil of the North Dakota Bakken oil field

The Monterey/Santos oil field in California is estimated to four times the technically recoverable oil as the Bakken Oil Field in North Dakota.

The Monterey field is also estimated to have 500 billion barrels of oil in place The Bakken oil field oil in place estimates range from 271 billion to 503 billion barrels (average estimate of 413 billion barrels).

Harold Hamm (billionaire owner of Continental oil) estimates the Bakken oil field will produce six times (24 billion barrels) the oil of the EIA estimate. Harold Hamm also believes that the San Joaquin Monterey California fields are the next big horizontal drilling play.

(It's a different EIA report)

 
At 1/23/2012 11:28 AM, Blogger Benjamin said...

What a lot of people don't know is that methanol can be made fro natural gas. Right now a company named Methanex will sell you methanol for $1.34 a gallon, made from natural gas.

Methanol is a lot like ethanol, not quite a calorific as gasoline. Still, you can run cars on methanol (Indy cars ran for decades on methanol).

There is no "energy shortage."

Peak Oil is likely to be Peak Demand instead.

Juandos, my friends from St Louis, is right. There is a lot of oil in th Monetrey/Santos field.

 
At 1/23/2012 12:07 PM, Blogger Benjamin said...

Not only that, but Petrobas says they can make modular gas-to-liquid (GTL) plants. All that shale gas can become syncrude.

The Peak OIl crow will have diarrhea for weeks after reading this.

http://www.theengineer.co.uk/channels/process-engineering/petrobras-approves-worlds-first-modular-small-scale-gtl-facility/1011475.article

 
At 1/23/2012 12:54 PM, Blogger Larry G said...

If the nat gas revival has sustainable reserves "legs", it's very good news for the country indeed.

It's a far cleaner fuel than oil or coal and it gives us the opportunity to diversify the grid... and a good reason to go forward with a load-balancing smart grid that far, far, into the future when the nat gas is depleted to higher efficiency incorporate solar and wind.

Nat Gas buys us a bridge to the future.

 
At 1/23/2012 4:49 PM, Blogger VangelV said...

I hate to burst the bubble that you are trying to inflate Mark but the EIA has a terrible track record that is even worse than that of the IEA or BP Statistical Review.

How does shale become a viable source of energy if prices stay low and break even costs run between $7.50 to $8.00 per Mcf? And what happens to productivity when the core areas that are now being exploited are past their peak? How do the marginal, low energy-density formations manage to produce enough gas to meet the EIA projections?

I am sorry but these fools sound just like the Fed economists who told us that the housing industry was sound in 2006.

 
At 1/23/2012 5:26 PM, Blogger Che is dead said...

This comment has been removed by the author.

 
At 1/23/2012 5:28 PM, Blogger Che is dead said...

"How does shale become a viable source of energy if prices stay low and break even costs run between $7.50 to $8.00 per Mcf? ... blah, blah, blah" -- Vange


Repeating the same gibberish in comment thread after comment thread does not make it true. There are NO costs associated with the production of shale gas - NONE! It's currently a byproduct associated with the production of crude oil, ethanes and other liquids which are extremely profitable:

High oil prices effectively subsidize the production of otherwise unprofitable natural gas. ... Although the energy industry typically talks about gas wells and oil wells, most wells usually contain a mixture of oil, gas and other petroleum products. In fact, nearly one-quarter of all U.S. gas production comes from oil wells ... many gas wells contain significant amounts of ethanes and other valuable liquids, which are sold separately and priced in relation to crude oil ... "Companies are making so much money on the oil and natural-gas liquids that gas is basically free," says Amy Myers Jaffe, director of Baker Institute Energy Forum, a policy think tank at Rice University in Houston. "They are saying to themselves: I am going to produce the gas regardless of what the price is, because I'm making money on the oil and liquids." -- The Wall Street Journal

With petroleum selling for $90 a barrel, drillers in places like the Eagle Ford shale or the Bakken can give away their natural gas for nothing and still make 100% annual returns on their drilling dollars. -- Forbes

Technology development and application are and will remain key elements in maximizing the full value of these large, long-life resources. Here are some examples: Unconventional production from Haynesville increased four-fold in 2010, while production in Fayetteville doubled in 2010. The Barnett Shale, where we currently have gross production of approximately 900 million cubic feet per day of gas, is another good example of value creation through technology. We have been able to maximize long-term ultimate recovery with longer lateral lengths and improved drilling and completion efficiency. And our net unit development cost in this shale play is about $1 per thousand cubic feet equivalent, a 50 percent improvement in the last five years ..." -- ExxonMobile

And technology continues to lower the costs of production:

The growing use of movable sleeves, a tubelike device with holes that fits inside a well bore, lets drillers target multiple spots to dislodge entrapped oil. This technique can reduce the $2.5 million startup cost of a fracking well near the Canadian border by up to two-thirds, according to a recent analysis by JPMorgan Chase. -- Next Big Future

 
At 1/23/2012 6:18 PM, Blogger VangelV said...

Repeating the same gibberish in comment thread after comment thread does not make it true. Their are NO costs associated with the production of shale gas - NONE! It's currently a byproduct associated with the production of crude oil, ethanes and other liquids which are extremely profitable:...

Try looking at the 10-K forms filed with the SEC and tell me that there are no costs. In the summer of 2010 the CEO of Devon was telling investors that the break-even price was between $6 and $7. Aubrey McClendon was telling investors that if he had his way he would only be running a drill or two because he could not make money at the low prices that his company was getting. (They are lower this year.)

I just did a Google search and found the following piece that is making the same points. If you go to the Oil Drum and a few other places you will find exactly the same thing. The conference calls are certainly not very cheery. The shale companies keep talking about asset sales and funding gaps even as they gloss over results that show substantial borrowings and negative cash flows.

All you have to do to prove me wrong is to cite the operational results from shale oil and gas by the producers. No hype please. Look at the 10-Ks for confirmation, not empty words by promoters.

continued...

 
At 1/23/2012 6:25 PM, Blogger VangelV said...

Continued...

...High oil prices effectively subsidize the production of otherwise unprofitable natural gas. ... Although the energy industry typically talks about gas wells and oil wells, most wells usually contain a mixture of oil, gas and other petroleum products. In fact, nearly one-quarter of all U.S. gas production comes from oil wells ... many gas wells contain significant amounts of ethanes and other valuable liquids, which are sold separately and priced in relation to crude oil ... "Companies are making so much money on the oil and natural-gas liquids that gas is basically free," says Amy Myers Jaffe, director of Baker Institute Energy Forum, a policy think tank at Rice University in Houston. "They are saying to themselves: I am going to produce the gas regardless of what the price is, because I'm making money on the oil and liquids."

The article isn't about shale gas. It talks a great deal about gas production coming from drilling for oil. A lot of that gas comes from conventional oil wells, not shale. Yes, these companies can make a lot of money. But that does not mean that the shale gas producers who get a bit of liquids can make it with prices as low as they are.

With petroleum selling for $90 a barrel, drillers in places like the Eagle Ford shale or the Bakken can give away their natural gas for nothing and still make 100% annual returns on their drilling dollars. -- Forbes

Show me the 10-K forms that tell me that shale gas is profitable. (And when you do make sure that you are not just looking at the production cost, which is a fraction of the total.)

Technology development and application are and will remain key elements in maximizing the full value of these large, long-life resources. Here are some examples: Unconventional production from Haynesville increased four-fold in 2010, while production in Fayetteville doubled in 2010. The Barnett Shale, where we currently have gross production of approximately 900 million cubic feet per day of gas, is another good example of value creation through technology. We have been able to maximize long-term ultimate recovery with longer lateral lengths and improved drilling and completion efficiency. And our net unit development cost in this shale play is about $1 per thousand cubic feet equivalent, a 50 percent improvement in the last five years ..." -- ExxonMobile

What exactly is meant by net unit development cost? What happens when you include all of the other costs? Does this cost include the full depreciation or is Exxon using the overstated reserve estimates and the high EURs that have yet to be seen in the real world?

And surely if shale gas were this profitable the pure shale gas players would be swimming in cash. But if that were true why are they swimming in read ink instead and trying to sell themselves off or find new credit lines.

 
At 1/24/2012 9:47 AM, Blogger Breaker Morant said...

http://news.investors.com/Article/598584/201201231427/profit-margins-continental-resources-northern-oil-visa-mastercard.htm?ven=yahoocp,yahoo

Vange, and others, check out this article in IBD. Contintel Resources, a large acreage holder and driller in the Bakken, had $.63 of profit per dollar of sales.
They topped IBD's metric for that category of all companies.
There is plenty of profit in the Bakken.

 
At 1/24/2012 10:00 AM, Blogger Breaker Morant said...

http://milliondollarway.blogspot.com/2012/01/for-investors-only-nog-clr-huge-profit.html

Actually, Northern Oil and Gas came in 3rd in the IBD deal. NOG is a company that is only in the Bakken. So 2 of the 3 top companies in the IBD profit deal are Bakken companies.
Google "Million Dollar Way" if the above links don't work. The story should be at or near the top. That is a "Bakken" Blog and he frequently links to Carpe Diem.

 
At 1/24/2012 11:02 AM, Blogger Hydra said...

There is plenty of profit in the Bakken.

+++++++++++++++++++++++++++++++Yes, Yes, but they got a lot of profit from renting spaces to campers.

 
At 1/24/2012 3:06 PM, Blogger Hydra said...

What a lot of people don't know is that methanol can be made fro natural gas.

Is there anyone who does not know this, really? Short of changing one element to another, you cna make nearly any hydrocarbon from any other hydrocarbon. It is just a Question of Cost. A lot of natural gas is used to make fertilizer, among many other things.

Yep, you can liquify natural gas, but you have to supercool it to do it. as Vange points out, it takes a lot of energy to do this, which means you use a lot of NG to make CNG, which raises the price.

Methanol is CH3OH and Ethanol is C2H5OH and Butanol is C3H7OH. Same as Methane is CH4, Ethane is C2H6 and Butane is C3H8. When you burn them you convert the carbon to CO2 and the Hydrogen to H20. In either case, the longer the chain the more energy released.

The lighter the molecule the higher the vapor pressure and the easier it is to create an explosive mixture with air. Methanol explodes easily and has an almost colorless flam when it burns, hence it is very dangerous as a fuel, which is one reason Indy cars no longer run on it.

As far as I can tell, Vange is 100% correct in his critique. We can do damn near anything, the trick is to make it pay. But anything we do has cost trade offs, and sometimes those trade offs are in things that are not priced or not properly priced. Until we get a whole lot better at agreeing on what people own and how they should be valued, we are going to make a lot of suboptimal decisions.

It is hard to figure why one producer is flaring gas becasue it is not worth delivering, when another porducer at the other end of the continent is drilling holes to get the stuff.

 
At 1/24/2012 9:34 PM, Blogger VangelV said...

Vange, and others, check out this article in IBD. Contintel Resources, a large acreage holder and driller in the Bakken, had $.63 of profit per dollar of sales.
They topped IBD's metric for that category of all companies.
There is plenty of profit in the Bakken.


Perhaps, but not for the shale gas industry as a whole. We all know that some of the core areas are actually quite profitable but once you leave them the cash flows turn negative and the losses mount. We already have 10-Ks and conference call admissions that tell us that the break even cost runs north of $7 for most companies.

Keep in mind that if you assume higher reserves and bigger EURs it is very easy to report a profit. The trouble appears when the real depletion rates come into play and the depreciation costs have to be restated down the line. For some companies this time may be a few years away. For others there is little room to run because their cash flows have them at the mercy of the financiers and the companies that are looking for acquisitions in order to hide their reserve depletion problems.

The last 10-K filing had the company generate around $600 million from operations but use up more than $1 billion for exploration and development. It pays no dividends and has no intention of paying dividends. You would think that if it were as profitable as is being claimed it would prove it by returning some cash to investors.

 
At 1/24/2012 9:38 PM, Blogger VangelV said...

Actually, Northern Oil and Gas came in 3rd in the IBD deal. NOG is a company that is only in the Bakken. So 2 of the 3 top companies in the IBD profit deal are Bakken companies.

Keep in mind how the accounting works. You take your production revenue and subtract your costs. Any good accountant can come up with any figure that he wants by making assumptions about the EUR and depreciation. The problem is that the production data tends not to fit the EUR assumptions. Eventually, they will have to agree and the most likely way that happens is a big write-down for most companies.

The companies that you want are those that are in the sweet spots of the core areas of the best formations and have no intention of drilling in marginal areas. Since there is not much good information out there it may be hard to determine which companies fit into that category. We will need several years more of decent production to confirm what is being reported. But given the price levels the risk is not worth taking in my opinion. I would rather look at other unconventional plays that have little hype surrounding them.

 

Post a Comment

Links to this post:

Create a Link

<< Home